5 'Must-Buy' Oil Stocks For Big Potential Gains Into 2013

The recent volatility and market drop has created some buying opportunities in a number of oil-related stocks. Buying oil sector stocks on pullbacks makes sense for a number of reasons. First of all, it is likely that sooner or later, the global economy will fire on all cylinders and when that happens, the price of oil could surge. A secular trend also appears likely as emerging market countries and consumers increasingly use more energy as their incomes rise. Rising incomes in countries like China, Brazil, and India, will lead to more demand for oil. Another supporting factor for the price of oil is all the money printing going on around the world. Deeply indebted countries may have no choice but to keep printing money, and central banks are doing their best to create inflation, which also makes oil more likely to rise. Investors tend to seek hard assets like oil and gold because central banks can't print these like paper money. With some great values available in oil stocks now, it makes sense to consider buying the names below for big potential gains into 2013. These stocks offer either very generous dividend yields or high-potential for capital gains, which makes them "must-buys" for investors seeking strong portfolio returns in 2013:

Abraxas Petroleum Corporation (NASDAQ:AXAS) shares could be poised for a great year in 2013. The stock has underperformed recently and tax-loss selling seems to be putting year-end pressure on the stock, but the currently low share price could be a terrific buying opportunity for a number of reasons. First of all, this company has been investing heavily in new projects that will increase future production, even though that has kept a lid on current profits. However, it could be ready for a strong 2013, as the company recently offered guidance that looks very promising. Abraxas expects production volumes to an average 4,900-5,200 of barrels of oil per day or "BOEPD." This is equivalent to growth ranging from 21% to 28%, and higher volumes should lead to much stronger profits in the coming quarters as it brings its newest wells into production. Aside from giving strong guidance for production growth, Abraxas is also taking further action that could unlock considerable shareholder value in 2013, as it recently stated:

The company is also actively marketing numerous assets which it deems non-core, assets with a low working interest or assets with little associated production that are not reflected in this guidance.

Abraxas appears serious about this goal, and it already announced a deal in which two non-core assets are being sold for about $22 million. A major shareholder recently asked the company to step-up the asset sales, as it feels the shares are deeply undervalued. According to the Clinton Group, (which believes it is one of the top 10 owners of Abraxas stock), the sum-of-the-parts and cash flow valuation analyses indicates that fair value is about $4.35 per share. It also said that "outright sales of non-core acreage should yield the company nearly $160 million, in addition to the $22 million in proceeds that are expected from the Nordheim and Alberta Basin deals already announced." Since this company has a current market capitalization of about $165 million, non-core asset sales in the amount of around $182 million would imply that this stock is indeed very undervalued. The Clinton Group provides these estimated values for the four non-core assets that it feels should be sold:

1. Powder River with an estimated 17,800 acres, valued at $44,500,000.

2. Western Alberta with an estimated 6,880 acres, valued at $17,200,000.

The combination of substantial production growth, a strong chance for additional non-core asset sales, and a bargain stock price make these shares worth buying now. Investors buying now could end up with a potential double if the stock gets to the estimated fair value of $4.35 per share (as per the Clinton Group), and it is interesting to note that this is very close to the 52-week high of $4.39 per share. I expect this stock to rebound when tax-loss selling season ends soon, because with the stock trading for less than half the 52-week high, it is probably seeing plenty of seasonal tax-loss sales, which will be over by December 31. Plus, more asset sales and increased production could power this stock much higher in 2013.

NGP Capital Resources Company, Inc. (NGPC) is primarily focused on making investments in oil and gas companies through secured debt, convertible debt, royalty interests, equity stakes and other related debt instruments. Since it is registered as a business development company or "BDC," it has special status, and this enables it to pay out a very high percentage of earnings to shareholders. As it makes profits on the sale of investments, and also receives investment income from a wide range of companies, it uses these profits to pay shareholders a quarterly dividend that tops most dividend-payers by a wide margin. This stock appears undervalued when you consider the yield of over 9%, plus it trades well below book value, which is about $9.70 per share. NGP management seems to think this stock is undervalued, and the company has been buying back its own stock this year. The company has repurchased over 250,000 shares and it is authorized to buy back millions of dollars worth of stock in the future. Stock buy backs can increase book value for shareholders and raise earnings in the future. Because this is a smaller company that is not as well-known as some major oil stocks that pay dividends, it can easily be overlooked, but with a yield of nearly 10%, it makes sense to get to know this company and buy some shares for the income it can generate for investors in 2013.

Total SA (NYSE:TOT) is based in Paris, France and it is one of the top five global oil companies. It has been in business for over 80 years, and it is involved in a wide range of activities in the energy sector. This includes exploration and production, refining, chemicals and even fertilizers. It also has a distribution network for Total automotive fuels, with more than 15,000 service stations around the world. It also has exposure and investments in alternative energies, such as solar. In June 2011, Total acquired a 60% stake in Sunpower. This gives the company diversification, but the big profits continue to come from oil.

Total has recently announced a couple of notable oil discoveries. On December 3, it disclosed that its affiliate "Total E&P Norge" made an oil discovery in the Norwegian North Sea, and it stated that preliminary estimates place the size of the discovery between 25 and 75 million barrels of recoverable oil. On December 5, it announced an even larger find in the Gulf of Mexico. This was at its North Platte prospect on Garden Banks Block 959, in the deepwater Gulf of Mexico. The company says further appraisal will be needed to confirm its size, but it estimates this discovery could have a potential of "several hundred million barrels of oil." Total has significant positions nearby in the Gulf of Mexico, and that means that other additional finds are possible in the future. The great thing about investing in Total is that while you are waiting for these new finds and projects to come into production, you are getting paid a generous yield of roughly 6%. That is much better than what its U.S. counterparts offer. For example, Exxon (NYSE:XOM) yields just about 2.6%, and it trades for about 10 times earnings. The price-to-earnings ratio is also another reason why Total is undervalued and worth buying because it trades for just about seven times earnings estimates. With the shares significantly undervalued, a yield that pays you to wait for a higher share price, and two major new oil discoveries that can grow earnings in the future, Total shares are worth buying for big potential gains and dividends in 2013.

Seadrill Limited (NYSE:SDRL) is another top potential pick for investors who want exposure to the oil sector and very strong dividend income. This company owns a fleet of drillships, jack-up rigs, semi-submersible rigs and tender rigs. It has one of the most modern fleets in the industry, which allows it to charge premium rates. More modern equipment generally has higher efficiency, and usually requires less maintenance and downtime. Seadrill sees a bright future ahead, and it is focusing on growth potential by adding to its fleet. It recently acquired a deepwater semi-submersible rig called "Songa Eclipse," and it has a number of new drillships and rigs, which are expected to be delivered in the first half of 2013.

Seadrill now offers a yield of over 9%, but it also has a history of raising the dividend. In 2009, the quarterly payout was 50 cents per share, but regular increases have brought the dividend up to 82 cents. Dividend growth can be just as important as the current yield, and this stock already offers a high yield that may grow in the future as the company expands with new drillships and rigs. Analysts seem to like the recent moves being made by management. Credit Suisse upgraded the stock in November and set a $48 price target. With the stock well below that level currently, investors who buy shares now could be poised to capture a high yield, plus significant upside in terms of capital gains into 2013.

Chesapeake Energy Corporation (NYSE:CHK) is the second-largest producer of natural gas in the U.S., and it is also one of the largest producers of oil and natural gas liquids. It has valuable projects in the Eagle Ford, Marcellus, Haynesville and Bossier ranges. Chesapeake shares could be poised for a strong rally into January because this stock has not performed well in 2012. The 52-week high for this stock is $26.09 and with the shares now trading around $16, it is one holding that has likely lost money for quite a few investors this year. That means it is probably seeing plenty of tax-loss selling right now as investors dump underperforming stocks to harvest tax-losses before the end of the year. If the stock is bottoming out now at about $16, just imagine what it might trade for once the supply of stock being sold for tax reasons comes to an end on December 31. The stock dropped earlier this year when investors learned that CEO Aubrey McClendon had interests in some of Chesapeake's projects. However, that incident has led to a shake-up, with energy industry veteran Archie Dunham joining the board, and the company has been active in making changes to boost shareholder value in the future. It has been looking at asset sale deals, and it recently announced a voluntary separation plan to 275 employees in an effort to reduce expenses. At currently low levels, Chesapeake shares are attracting the interest of at least one famous investor, with billionaire Carl Icahn recently disclosing that he owns nearly 9% of the entire company. Carl Icahn is known for making money in stocks, and for encouraging management to focus on shareholder value and more efficient operations. With a board that seems more focused on its shareholders, Mr. Icahn's involvement and major ownership stake, and a depressed stock price trading below book value, which is $19.03 per share, it makes sense to buy on dips for what could be a solid rebound into 2013.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I am long NGPC,, and I may initiate a position in AXAS in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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